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These funds are an effective retirement funding vehicle for all South Africans, and may well be an alternative to Government’s proposed National Social Security Fund, says David Gluckman, head of special projects at Sanlam Employee Benefits.

“We have seen the commercial umbrella fund industry growing from just under 800 000 members in 2009 to more than 1.6 million members today. The latest data from the Financial Services Board (FSB) indicate that assets under management in these funds are now at around R250 billion,” Gluckman says.

He says although South African commercial umbrella funds have been around since the mid-1980s, the early models were often criticised for offering poor value for money and side-stepping many of the governance and representativity features of stand-alone retirement funds.

“There have been significant improvements in commercial umbrella funds since then. They have really cleaned up their act, and the major funds are now leading models for good governance and value for money. Industry-leading independent professionals, often elected via members to comprise 50% of the boards of trustees, are becoming the norm rather than the exception.”

Commercial umbrella funds have not only embraced the principle of social solidarity, but have over the past few years taken on board and tried to improve on aspects where there may be valid criticism of existing benefit designs in the employee benefits industry, he says.

These aspects include more cost-effective governance models, simpler ways to charge fees that make product comparability simpler, and elimination of unnecessary bells and whistles for ordinary members where cost efficiency is vital, while also allowing greater flexibility and customisation for the small number of affluent members prepared to pay for such additional features.

“The Sanlam Umbrella Fund has, for example, recently introduced a new retirement savings vehicle called the Optimal Product Option, which offers an appropriate and competitively priced default investment strategy, while allowing for significant flexibility at an appropriate price for members wanting customisation. As such, it offers the best of both worlds, and has been designed to improve the retirement outcomes of all employees.”

“The offerings in the commercial umbrella fund space will increasingly evolve as the crucial conversations and competitive pressures continue. New-generation umbrella funds that offer the best of both the institutional and the retail worlds are the likely result. The future of the retirement fund industry might be significantly different in the next 20 or 30 years, but umbrella funds continue to offer solutions designed to improve retirement outcomes for all South Africans,” Gluckman concludes.

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